Put-Call Parity
Kerry Back

- Protective put portfolio is same as call with cash
- Cash = PV of strike
- Stock ends up \(\Rightarrow\)
- With put, keep underlying
- With call, exercise to get underlying
- Stock ends down \(\Rightarrow\)
- With put, exercise to get cash
- With call, keep cash
Prices of puts and calls
- Put-call parity implies that underlying price + put premium should equal PV of strike plus call premium
- Equivalently, put premium = call premium + PV of strike - underlying price
- Equivalently, call premium = put premium - PV of strike + underlying price
- Actually, this is true only for European options on stocks that don’t pay dividends before the option maturity.